Ian Castles on IPCC Economic Assumptions

Ian Castles, the well-known economist, has sent in the following post as a comment on another topic, which I have taken the liberty of posting up here. Ian writes:

During the past three years I and a co-author (David Henderson, former Head of the Department of Economics and Statistics at OECD) have criticised the IPCC’s treatment of economic issues.

Our main single criticism has been the Panel’s use of exchange rate converters to put the GDPs of different countries onto a common basis for purposes of estimating and projecting output, income, energy intensity, etc. This is not permissible under the internationally-agreed System of National Accounts which was unanimously approved by the UN Statistical Commission in 1993, and published later that year by the United Nations, the World Bank, the IMF, the OECD and the Commission of the European Communities, under cover of a Foreword which was personally signed by the Heads of the five organisations.

The practice of exchange rate conversion has been explicitly rejected by at least three Nobel Laureates in economics (Sir Richard Stone, Paul Samuelson and Amartya Sen) and three Distinguished Fellows of the American Economic Association (Irving Kravis, Robert Summers and Alan Heston). In the course of the current controversy, Sir Partha Dasgupta of Cambridge University has told Stephen Schneider of Stanford University, a leading IPCC figure, that “Castles is of course completely right” (in rejecting the use of “outmoded accounting practices”); William Nordhaus of Yale University advised an IPCC Expert Meeting on Emissions Scenarios last January that estimates of output or income using exchange rates are “simply wrong”, “constructed on an economically unsound basis”, “fundamentally wrong”, “highly misleading” and “precisely wrong”; Richard Tol of Hamburg University informed the recent UK House of Lords Committee inquiry into “The Economics of Climate Change” that the IPCC scenarios “essentially assume convergence based on market exchange rates, which is ludicrous”; Ross McKitrick of Guelph University drew the Committee’s attention to a statement by John Reilly of MIT that the IPCC scenarios exercise was “in my view, a kind of insult to science”; and the world’s leading expert on historical international comparisons of output and income, Angus Maddison, gave the Committee “an illustration of the implausibility of using exchange rate converters in historical analysis or futurology (as in the IPCC Special Report on Emissions Scenarios) In its unanimous report, the 13-member Select Committee on Economic Affairs of the House of Lords said that “We found no support for the use of MER in [long-term emissions scenarios], other than from Dr Nakicenovic of the IPCC.”

None of this criticism has moved the IPCC. Its Chairman, Dr Rajendra Pachauri of India, told the House of Lords Committee that the criticism of the emissions scenarios “only validates the methodology that the IPCC used earlier” and “does not invalidate it”. A press statement published on the IPCC website which is devoted specifically and exclusively to brushing aside the Castles and Henderson critique says that the IPCC “mobilises the best experts from all over the world”, and describes us as “so called “two independent commentators'”. The IPCC has selected Professor Nakicenovic and Brian Fisher, Director of the Australian Bureau of Agricultural and Resource Economics (ABARE), as the two Coordinating Lead Authors of the chapter in the Panel’s next assessment report (AR4) that is to assess criticism of the IPCC Special Report on Emissions Scenarios (SRES). In their first response to the Castles and Henderson critique, Professor Nakicenovic and 14 other lead authors of the SRES said that “Mr Castles and Mr Henderson have focused (at tedious length) on constructing a “problem’ that does not exist”, and in their “final” response Nakicenovic and 17 other lead authors persisted in affirming the “methodological soundness of the use of MER for developing long term emissions scenarios”. Brian Fisher, the other CLA of the chapter that is to assess the IPCC scenarios, is the co-author of an article published by ABARE (of which he is Director) which states that “The use of [market exchange rates] in the SRES remains valid and the critique by Castles and Henderson cannot be sustained.”

Australia’s leading scientific research organisation, the CSIRO, appended an opinion piece by atmospheric scientist Kevin Hennessy to its submission to an Australian Senate Committee Inquiry into the Kyoto Protocol Ratification Bill 2003. According to Mr Hennessy, Castles and Henderson have claimed that the IPCC warming projections are based on greenhouse emissions that are too high because market exchange rates (MER) were used rather than purchasing power parity (PPP) in calculating future economic growth. The claims have been reviewed and refuted by international experts (Nakicenovic and others). The list of references to the opinion piece did not include any paper by “Nakicenovic and others”. Mr Hennessy subsequently declined an invitation to produce a paper on the CSIRO’s emissions scenarios for Energy & Environment (the journal in which Nakicenovic et al appeared), on the grounds that the CSIRO prefers to publish in peer-reviewed journals listed by the Institute for Scintific Information (ISI). Mr Hennessy has been selected as a Coordinating Lead Author of the “Australia and New Zealand” chapter of the next IPCC Report.

At the IPCC Expert Meetings on Emissions Scenarios last January, Professor John Weyant of Stanford University, Director of the Energy Modeling Forum, defended the use of exchange rate converters by the IPCC on the ground that “best practice can differ between making historical welfare comparisons and model projections of GDP, energy and carbon emissions.” According to the Report of the meeting “Weyant recommended using MERs or PPPs consistently.” It is of course a contradiction in terms to urge the use of MERs “consistently”. In a letter to Dr Pachauri three years ago I pointed out that an expert committee appointed by the UN Statistical Commission had found that there were “material errors” (that is, errors which left the reader with “a fundamentally distorted view of the phenomena being described” in the UNDP’s Human Development Report 1999. I noted that the same statements had been repeated uncritically in IPCC reports. Two of these were in a chapter of the last assessment report of which Professor Weyant was Coordinating Lead Author. The IPCC has not acknowledged that any mistakes were made in the last assessment report and has selected Weyant as Review Editor of the Chapter in the next assessment report which is to review criticisms of the IPCC emissions scenarios.

Another Lead Author of the next IPCC Assessment Report whose country of residence appears on the IPCC lists as “Australia” is Bill Hare, who was one of the invited experts to the recent IPCC Workshop on Emissions Scenarios (as a representative of “Greenpeace, Environmental NGO”). Mr Hare argued for a strong role for the IPCC in the development of scenarios in the future, and asserted that the SRES had been a “big success”.

In my first letter to the Chairman of the IPCC three years ago, I said that it would “be desirable to seek the involvement of national statistical offices and of the International Statistical Institute (ISI) in the new emissions projections that I understand are to be prepared for the IPCC’s Fourth Assessment Report.” The IPCC subsequently decided that there would be no emissions projections. It has not invited any representatives of national statistical offices or of the ISI to any of its expert meetings, nor have any national accounts experts been included in the writing teams for the next assessment report.

The IPCC can ignore the world’s leading economists and statisticians with impunity, because it has the support of “the worldwide scientific community”. In its submission to the House of Lords Committee, the Royal Society (UK) explained that:

“The work of the IPCC is backed by the worldwide scientific community. A joint statement of support was issued in May 2001 by the science academies of Australia, Belgium, Brazil, Canada, the Caribbean, China, France, Germany, India, Indonesia, Ireland, Italy, Malaysia, New Zealand, Sweden and the UK. It stated: “We recognise the IPCC as the world’s most reliable source of information on climate change and its causes, and we endorse its methods of achieving consensus.”

The joint statement of support appeared in “Science”, the journal of the American Association for the Advancement of Science. In a news item published in the same issue of “Science”, the President of the Royal Society, Lord May, explained that the Royal Society had organised the petition because of resistance to the terms of the Kyoto Protocol by countries such as the US and Australia.

I’ve inadvertently misquoted Dr Pachauri’s evidence to the House of Lords Committee. In response to Lord Skidelsky’s question “So the critics have influenced the methodology. In other words they have influenced the IPCC”, Dr Pachauri said: “We welcome that. It only validates the methodology the IPCC used earlier. It does not require a deviation from it.”

Also, I should have said that the IPCC decided that there would be no NEW emissions scenarios for AR4. At its plenary meeting in Vienna in November 2003, the Panel determined that “the SRES scenarios provide a credible and sound set of projections, appropriate for use in the AR4”.

Since the IPCC is so confident of their methodology, I would propose that whenever the IPCC members travel that they use exchange rate converters to determine their daily reimbursement for food. To make this fair to all members, let’s pick a daily rate of RMB150, since this will allow one to dine rather well in Beijing.

By using the IPCC’s exchange rate converters this gives them the dialy allowance of SFr14.56, 10.29 Pounds, or Euro15.14. By the IPCC methodology, the members should have no trouble feasting in Geneva, London or Paris on this daily allowance.

As an economist I have been following this controversy with some interest. There is no doubt that Castles and Henderson are right that cross country comparisons at a point in time ought to be made using PPP exchange rates. No serious economist could disagree. However after that things get a bit more complicated. The big question is whether the use of MERs by the IPCC authors biases their emission projections upward. At first glance the answer seems likley to be that it does because the models used assume that GDP growth partly depends (positively) on the gap between the level of GDP in poorer countries compared to advnaced countries, which use of MERS instead of PPPS clearly exaggerates. However this is just one feature of the models. Another feature, which offsets the bias to some degree, is that use of MERs also overstates the energy inefficency of poor countries as measured by energy use per unit of GDP (because GDP is understated whereas energy use is in physical units which are unaffected by exchange rate conversion). The models typically assume some degree of convergence of energy intensities as well, which therefore offsets the bias from overestimating the GDP gap. Moreover carbon emissions are not just a function of GDP but a complex function of the structure of growth. My understanding is that some authors, eg a couple of Norwegians, argue that the two biases effectively cancel out in their model, but other authors, eg Warwick McKibbinet al, argue that in their model use of MERs overestimated carbon emissions by about 30%.
It turns out that no-one has really been taking the PPP/MER issue seriously enough in growth studies. Nordhaus had a paper prepared for the Meeting of IPCC Expert Meeting on Emission Scenarios, US- EPA Washington, DC, January 12-14, 2005, Revision dated February 8, 2005. “This study analyzes the question of the use of purchasing-power parity versus market exchange rates in constructing global economic models. It concludes that the best approach is to use superlative PPP accounts; this approach uses cross-sectional PPP measures for relative incomes and outputs and relies on national accounts price and quantity indexes for time-series extrapolations.” ie use PPPs for measutring gpas but use MER-like measures for extrapolating growth. The full paper is here

My conclusion is that we should be looking at these economic scenarios again in the light of waht has been a very fruitful debate. So I was a bit surprised that
it seems to have been concluded that the existing IPCC scenarios are regarded as good enough to base the next report on.

I suspect that none of these economic studies have factored in “new” discoveries of energy.

Before petroleum was discovered, whales were hunted for oil to light homes and to baleen to support the fair sex’s gravitational problems concerning anatomy.

History has shown that, for whatever reason, humanity seems to make a new discovery whenever doom and gloom are prevalent, resulting in yet another spurt in economic activity when previous diminishing resources are replaced with new ones.

So has the IPCC ( Ian Castles ought to follow on from here) factored this in their scenarios for the future?

If we suddenly discovered a new source of energy which did not require the combustion of oil or enhanced decay of radioactive elements, and which has historically occurred when petroleum replaced whale oil, etc, has this been factored?

I suspect not, because none of us know the future, save Steve’s diligent critics who, like the prophets of old, are totally certain of their views.

Steve, like myself, is a mining industry type of the other kind, “kosher” , and while commenting from different perspectives, both us recognise a scam, whether mining or climate. Same principles, different rhetoric.

Mike P: I agree eith most of what you say, but I don’t understand why you describe national accounts price and quantity indexes as “MER-like measures”. Such indexes are derived by disaggregating the price and quantity components of changes in nominal output, measured in national currencies. Exchange rates don’t come into these calculations, so why describe them as “MER-like measures”? Please see my paper (co-authored with David Henderson) “International Comparisons of GDP: Issues of Theory and Practice”, in “World Economics”, vol. 6, no. 1, January-March 2005: 55-84, which is available online at http://econpapers.repec.org/article/wejwldecn/192.htm .

Ian,
Not expressed well I agree. What I had in mind was that after using PPP to get the base comparison we don’t have to worry further but just update using national indices. I thought the IPCC write-up of the Feb meeting

The implication of the comments by Louis Hissink and Mike P (#5 and #6) is that it is extremely difficult to say anything useful about what will happen in 100, or even 50, years’ time. I agree with that. David Henderson said in his oral evidence to the House of Lords Committee: “I have looked closely at only the next 30 years, which, for me, we should be giving a bigger weight than what happens afterwards.” Over a 30-year span, the effects of “new” discoveries of energy is unlikely to be very significant, yet one IPCC scenario (A1 ASF) projects a 5-fold increase in fossil CO2 emissions between 2000 and 2030. Even the lowest-emission projection of the IPCC marker scenarios (B1 IMAGE) projects an increase by a multiple of 2.7 between 2000 and 2030, which is higher than many other medium-term projections. Under B1 IMAGE, fossil fuels still account for almost one-half of primary energy supply in 2100, so I think the short answer to the question Louis raises is “No, the prospect of ‘new’ energy sources has not been factored in.”

Re #5 and whaling: Louis, when you plot out some of the CRU time series with strange ARMA(1,1) coefficients from a calculation with a minimum of only 100 observations (my first pass calculation), a lot of the outliers come from the Southern Ocean near Antarctica. There were often a bunch of measurements in the late 19th century and then a bunch of measurements in the late 20th century. I presume that the first tranche came from whaling vessels and ceased when whaling ended. I wonder how they ensured homogeneity across a gap of over 50 years. Perhaps they adjusted for canvas and wooden buckets using Hadley Center protocols.

Ian Castles says: “it is extremely difficult to say anything useful about what will happen in 100, or even 50, years’ time.” How true. This whole GCM projection debate is so similar to the 1970s “limits to growth” debate over econometric forecasting models (hundreds of equations!) such as the FRB-PENN-MIT model used by the Fed when I worked there. After the first energy crisis in the 70s it was confidently “forecast” that oil would soon reach $100 per barrel. This type of forecasting is still around. The NYT article on “Peak Oil” is a good example. Even while noting how much shale oil is available if crude sells for $40 a barrel or above, nevertheless the peak oil people claim that crude prices will skyrocket and cause an economic cataclysm.
The macro models never panned out. But this type of long-range forecasting is still alive and well at the IPCC.

I find it really refreshing that the House of Lords economic affairs committee issued a scathing criticism of the IPCC work, despite the exhortations of Lord May, President of the Royal Society. Why is May so enthusiastic?
Roger B

Re #13. I’m prompted by this comment, with which I agree, to reproduce an extract from what the Royal Society submitted to the House of Lords Committee about the Kyoto Protocol, and an extract from the Committee’s recommendations:

FROM THE ROYAL SOCIETY SUBMISSION:

“Nevertheless, the Kyoto Protocol … remains A CRUCIAL FIRST STEP towards the SUBSTANTIAL CUTS IN EMISSIONS that will be required this century… It is essential that the next commitment period for the Protocol, beyond 2012, includes both developing countries and industrialised countries such as the United States. The joint statment by 16 national academies of science in May 2001 demonstrated support from the international scientific community for the Kyoto Protocol. It stated: ‘The ratification of the Protocol represents a small but

Continuing post 14: ESSENTIAL FIRST STEP towards stabilising atmospheric concentrations of greenhouse gases. It will help to create a base on which to build an equitable agreement between all countries in the developed and developing worlds for the MORE SUBSTANTIAL REDUCTIONS THAT WILL BE NECESSARY by the middle of the century” (EMPHASES added)

FROM THE REPORT BY THE SELECT COMMITTEE ON ECONOMIC AFFAIRS OF THE HOUSE OF LORDS:

“We note that the compliance mechanisms in the Kyoto Protocol are very weak and even counter-productive. We heard from several witnesses that the Kyoto targets themselves were going to make little difference to rates of warming. We consider that the ‘beyond Kyoto’ negotiations … will have a take a far more innovatory approach than simply assuming that the Kyoto targets will be tightened… It could be argued that it is late in the day to be suggesting a significant change of focus in the climate negotiations. But we fear that the ‘more of the same’ approach, focusing on emissions targets, will fail… The important issue is to wean the international negotiators away from excessive reliance on the ‘targets and penalties’ approach embodied in Kyoto. Hence theere should be urgent progress towards thinking about wholly diufferent, and more promising, approaches based on a careful analysis of the incentives that countries have to agree to any measures adopted.

Continuing #14. … ESSENTIAL FIRST STEP towards stabilising atmospheric concentrations of greenhouse gases. It will help to create a base on which to build an equitable agreement between all countries in the developed and developing worlds for the MORE SUBSTANTIAL REDUCTIONS THAT WILL BE NECESSARY by the middle of the century” (EMPHASES added)

FROM THE REPORT BY THE SELECT COMMITTEE ON ECONOMIC AFFAIRS OF THE HOUSE OF LORDS:

“We note that the compliance mechanisms in the Kyoto Protocol are very weak and even counter-productive. We heard from several witnesses that the Kyoto targets themselves were going to make little difference to rates of warming. We consider that the ‘beyond Kyoto’ negotiations … will have a take a far more innovatory approach than simply assuming that the Kyoto targets will be tightened… It could be argued that it is late in the day to be suggesting a significant change of focus in the climate negotiations. But we fear that the ‘more of the same’ approach, focusing on emissions targets, will fail… The important issue is to wean the international negotiators away from excessive reliance on the ‘targets and penalties’ approach embodied in Kyoto. Hence theere should be urgent progress towards thinking about wholly diufferent, and more promising, approaches based on a careful analysis of the incentives that countries have to agree to any measures adopted.”

Hi all
I live in New Zealand. We are the only stupid country to want to ratify our obligations on carbon credits.
The present communist, oops socialist government also was seriously conidering bring in the ‘Fart Tax’ for sheep and cows as they produce methane. The farmrs raised a stink on this and the govt had to back down. It is all about tax in New Zealand at present I am afraid, Australia is looking like a better option to go and live in as long as I don’t bump into Tim Lambert.
Regards from new zealand
Peter Bickle

There’s an interesting talk (oops, speech) by Lord May given at the British Embassy in Berlin recently. It’s at http://www.britischebotschaft.de/en/news/items/050307.htm. It makes disappointing reading.
May says that “Temperatures rose during the past century, and particularly during the past thirty years. This rise made the twentieth century the warmest period for the Northern Hemisphere in at least the past 1000 years.” MBH98 have a lot to answer for!
He really doesn’t like the London Daily Mail (I suspect that if he read the Wall Street Journal he wouldn’t like that either) because they have published six opinion pieces in the last 15 months, four being by their science editor, using “misleading evidence against global warming”! It’s even worse because the Daily Mail has nearly 6,000,000 readers a day!
This criticism has led the Royal Society to publish a guide on facts and fictions about global warming, since the Daily Mail is reporting the views of “an extreme fringe”. The House of Lords Select Committee on Economic Affairs probably got copies but rejected them.
It’s really very strange. May is obviously brilliant, he’s worked in several different fields and held professorships at the very best Universities and yet he is the one with the closed mind.
I wonder if he knows about Barton’s actions.
Roger Bell
PS Steve, the Daily Mail might be a good place for an article…..

To comment on 4 of the above:
#10 – Interestingly the skeptics seem to accept economic models without question while rejecting climate models. they tend to uniformly accept the high cost of Kyoto, estimated from economic models, as a given. I have already commented on the flaws in the economic models both here and on Prometheus, so will say no more.
#5, # 8 and # 12 Given realistic reserve estimates for fossil fuels, in a BAU scenario, emissions will likely peak near 2030 at about 20% above present values. Maximum CO2 concentrations could then reach the B1 lower band scenario. However with sharply rising prices already kicking in a BAU scenario is most unlikely. Most of the SRES call for more fossil fuel consumption than can be provided by all of the worlds known reserves. They depend heavily on “resources” which are estimates that cannot even be called SWAGs. None of the SRES provide for reasonable estimates of growing efficiencies, conservation and sequestration, all of which will likely be forced by the economics of producing and using fossil fuels going forward. Shale oil is a non-starter and bitumen/tarsands can’t be produced rapidly enough to add >10 % to reserve based possible emissions by 2100. This flaw in the SRES is even more significant than the use of MER vs PPP. Murray

Responding to #19 – when I first got interested in this topic – I suppose about 2 or 3 years ago, I seem to remember there was some discussion of economic issues, with some people remarking that the use of exchange rates by the IPCC caused absurdities. So I didn’t worry about that but looked more at the science, which did have more connection with what I had done professionally.
Roger Bell

Re #3. In my report to the OECD in 1997 on the OECD/Eurostat PPP Program, I said: “The reality that there are significant inter-country differences in price levels has always been recognised in the internal arrangement which all international organisations … must make in order to manage their transnational operations. It is, for example, quite fundamental tyo the work of the International Civil Service Commission of the United Nations … in the world-wide operations of the United Nations and other international organisations which participate in the United Nations common system.” Of the 53 members of the writing team of the IPCC “Special Report on Emissions Scenarios”, 25 came from countries of the European Union and 45 were from countries of the OECD. None of them were from statistical agencies and none seems to have known of the provisions of the System of National Accounts to which their countries are signatories. Professor Nakicenovic, the coordinating lead author of the SRES, told the House of Lords Committee that “There were a number of colleagues who are very, very close to national accountants that have been associated with the SRES exercise”, and named a “person from the statistics community… from the Central Planning Bureau in the Netherlands Bureau of Economic Policy Analysis [who] was involved … in the IPCC scenario exercise.” The person concerned is not listed in the writing team in the IPCC report and the agency in question is not a statistical agency. The Netherlands Central Bureau of Statistics is one of the most highly regarded statistical agencies in the world but (like all other statistical agencies) was ignored by the IPCC’s modellers.

The high end warming of 5.8 C in 2100 is frequently quoted, so much so that one would think it is the most probable result rather than the most extreme result. It was added in the IPCC process at the last moment to replace the former upper limit of 4.5 C in 2100. Anyway, the 5.8 C warming requires the highest climate sensitivity coupled with a carbon dioxide concentration in 2100 around 1240 ppm. As I recall 500 GtC of fossil fuels have been burnt and the upper limit on all reserves, both discovered and undiscovered, is another 3500 GtC. So one eighth of the fossil fuels are gone with a 100 ppm increase. One would think then the remaining fossil fuels would be able to give rise to an additional 700 ppm if they were all burnt, so the net maximum upper limit would be 1080 ppm in the most extreme case. That is less than IPCC scenario based solely on economic projections. The upper IPCC scenario of 1240 ppm seems physically impossible. It also seems unlikely, as fossil fuels become scarce, that people would use them faster and faster.

Re:#22
You have to consider “resources” to get any where near 3500 Gt C. IIASA ’97 estimated total resources at that time as 4678 GtC. (Don’t you just love 4 significant digits on something that isn’t even a SWAG?). The World Energy Council in 1993 had estimated 4419 Gt. 4500 Gt has appeared fairly often as an estimate. However looking at “reserves”, with a liberal allowance for “reserve growth” and “yet-to-find”, we have only 1400 Gt C. This number excludes tar-sands and shale oils (really kerogen), because of the slow production rate of tarsands and the realistic net energy yield of kerogen. Looking at realistic production to 2100, tarsands could add 50 to 100 Gt. So, if we exhausted all “known” reserves of fossil fuels, including the growth and ytf, and threw in the tarsands we could emit less than 1500 Gt from 2000 through 2100. From 1750 to 2000 emissions are estimated as 290 Gt C, causing a 90 ppm increase in atmospheric concentration. Given that fossil fuel availability must peak and decline, and that production slows and becomes increasingly both energetically and economically more expensive after the peak, we are very unlikely to exhaust more than maybe 60% of remaining reserves, or about 900 Gt max. If none of that got sequestered atmospheric concentration might go up by another 300 ppm, but that’s a real pessimistic projection. My own guess is worst case peak atmospheric concentration less than 550 ppm, before 2150. A likely case would be both lower and sooner, but not much befor 2100. Emissions however are likely to peak before 2050. Murray

1. Maybe we can have the peak oiler hysteriacs and the CO2 warmers negate each other? Can they both be right?

2. The failure of the IPCC to pay attention to a detail on economics does not surprise me. I would not be surprised if more than half of the crew has that sort of distrust of economics that leads to the most classic misunderstandings of microeconomics and distrust of economists as inherently conservative (though they are not, nescesarliy).

3. Despite 3, I’ve never quite understood the fetish for PPP vice exchange rates. Yes, PPP gives a single reference and avoids some strange swings. However, exchange rates are market decisions. PPP are some kinda cobbled together CPIish statistical non-market measure. In a certain sense, the exhange-denominated amount makes sense as to what a foreign asset is worth…(I have not looked into it in depth, so am willing to hear why PPP rawks if you want…)

Sorry, TCO, but you are comprehensively and completely wrong on the PPP vx exchange rates issue. It’s good to know that your willing to hear why you are, and I suggest that you begin by reading Ian Castles and David Henderson, “International Comparisons of GDP: Issues of Theory and Practice”, which was published in “World Economics”, Jan.-March 2005 and is available at http://econpapers.repec.org/article/wejwldecn/192.htm . You could also look at David Henderson “SRES, IPCC and the Treatment of Economic Issues: What Has Emerged?” in “Energy & Environment, vol. 16, nos. 3&4, 2005 (the current issue). Henderson says among other things tbat “Exchange rates – whether past, current or prospective, historical, conjectured or model-derived – … are not relevant to the definition or measurement of either output (real GDP) or changes in output over time. Procedures and model constructions that build them in, including those presented in the SRES, are unsound” (p. 557). (David Henderson is a former Head of the Economics and Statistics Department of the OECD and a former Director of the Economics Department of the World Bank). Finally, you could read the paper by Yale’s Bill Nordhaus that is cited by Mike P at #4 above. Nordhaus says among other things that estimates of output or income that are constructed using exchange rates are “simply wrong” (p. 3), “fundamentally wrong” (p. 6), “highly misleading” (p. 29) and “precisely wrong” (p. 29). Note that Nordhaus’s paper was presented in his capacity as keynote speaker at the IPCC Expert Meeting on Emissions Scenarios in Washington DC last January, and that he is referring to the procedures used in developing the scenarios that the IPCC has decided “provide a credible and sound set of projections, suitable for use in the AR4 [i.e., the IPCC current Assessment Report to be published in 2007].

TCO, If you haven’t already found the Castles/Henderson paper, you’ll find one free at http://eprints.anu.edu.au/archive/00003050/ The short answer to your concern that PPP is not a market value is that it is. I’ll give you a fuller answer later.

I still have concerns about the basic non-market materiality of using PPP vice exchange rates. I mean, snow is worth more in the Sahara than in Alaska. But reliance on LoOP, implies that its value is the same.

TCO, In the hope that it helps to answer your question about the market, I’ll paste in here some paragraphs from a paper by Jacob Ryten, the consultant to the United Nations on the International Comparisons Programme (I was the consultant to OECD on the similar OECD/Eurostat Programme). Ryten’s paper was published in “Energy and Environment” in 2004 (vol. 15, no. 3) and he is commenting on the responses of, respectively, 15 and 18 IPCC authors to the criticism by Castles and Henderson:

“For reasons which I do not fully understand, the authors believe that if PPPs have deficiencies and rely on questionable assumptions, the information they provide would be improved if used in conjunction with MERs. The mechanism that would make it possible for the irrelevant to assist the infirm is not specified but here is a specific case which provides a test of the proposition of Grubler et al.

“Take Brazilian GDP both before and after the introduction of the ‘real’ as a currency. Convert it into US dollars using any exchange rate at hand. Try and interpret the results. Now turn to an alternative and express the results in terms of purchasing power using the crudest approximation possible (such as, for example, The Economist’s Big Mac Index). The results using the latter approach have some sense, although they may have a huge bias. In practice, what would be the procedure to improve on them by using them in conjunction with MERs?

“Grubler et al are justified in expressing reservations about the RESULTS of the ICP or of other intercountry estimates of GDP using PPPs, and their instinctive urge to use information that is seemingly unambiguous, available at all times and capable of providing long term time series is understandable. But it is also irrational. If the something in question is inapplicable, known to give the wrong signals and generally discredited, it should be banned rather than used as a crutch. The only viable alternative to the use of inadequate PPP-based estimates is better PPP-based estimates.”

At the risk of again being accused of “shouting louder”, I will also include another quote from the Ryten paper:
“I cannot help being shocked by the contrast between the [IPCC] scenario team’s bold assertions and peremptory dismissal of the arguments advanced by Castles and Henderson and their manifest ignorance of the conceptual and practical issues involved in developing and using inter-country measures of economic product.”

I’ll also key in here an extract from the recent report of a Committee of the UK House of Lords on “The Economics of Climate Change”:

“[T]he IPCC … insists on the “methodological soundness of the use of MER [market exchange rates] for developing long-term emissions scenarios”. We found no support for the use of MER in such exercises, other than from Dr Nakicenovic of the IPCC. We consider that Professor Henderson and Mr Castles were right to raise the issue. In so doing, they have helped to generate a valuable literature that calls into question a whole series of issues relating to the IPCC SRES, not just the issue of MER versus PPP… It seems unlikely that the debate over the emissions scenarios would have occurred at all had Professor Henderson and Mr Castles not persisted in their views. We consideer that they have performed a public service.”

You could make the same comment about the value of a company (market capitalization), that it jumps all over the place. But that’s still the value in my book. P.s. I’m reading, give me some time. Would really like a decent book. Maybe by a macro weenie with a micro slant. Since micro rawks and macro is for weenies. no offense.

TCO, The law of one price relates to the purchasing power parity PRINCIPLE. You’re quite right to be sceptical about that. But the use of PPP converters to compare the GDP of one country with another is an entirely different thing. I’ll paste in another bit from Alan Heston’s paper to the Stanford workshop – he’s commenting on the Manne and Richels paper that the IPCC cited in dismissing the Castles and Henderson critique:

“M-R (2003, p. 2) treat criticisms of the Purchasing Power Parity doctrine as if they were criticisms of the use of PPPs as a conversion factor, when the exact opposite is the case! Criticism of Cassel and one price is a strong argument IN FAVOUR OF using PPPs rather than MERs for converting monetary aggregates, like GDP, to a common currency for purposes of comparing quantities or levels of productive activity.
“M-R (p. 2) begin saying,
“Critics of PPP suggest that it has serious limitations for exchange rate conversions. Among the criticisms are that: 1) the market basket of goods and services includes non-traded goods, and this precludes arbitrage: 2) there are significant transaction costs for traded goods; and, 3) the composition of the market basket is likely to differ across countries.”

“Note these are all criticisms of the Purchasing Power Parity Doctrine; and in fact are arguments in favor of using PPPs as the conversion factor. In the next sentence they say,
“Samuelson expressed his skepticism of PPP noting, ‘unless very sophisticated indeed, PPP is a misleading pretentious doctrine, promising what is rare in economics, detailed numerical precision.'”

“Observe that Samuelson is not criticizing the use of estimated PPPs for conversion of economics aggregates, but rather he is explicitly criticizing the misleading pretentious purchasing power parity doctrine. One interpretation of the use of the Samuelson quotation by M-R is that the authors are unaware that the purchasing power parity doctrine and PPPs are not the same thing, a not uncommon confusion. But the use of Samuelson’s criticism of the misleading pretentious doctrine appears to be the only intellectual basis provided by M-R for using MERs for conversion in preference to PPPs. In fact the quotation criticizing the doctrine is tantamount to criticism of what Manne and Richels do when using MERs.
“M-R also reference the seminal article of Bela Balassa (1964) that was also criticizing the misleading pretentious doctrine. The Balassa-Samuelson effect is precisely that PPPs depart systematically from MERs, and Balassa was arguing that economic research should take this into account. The treatment of Cassel by M-R does little to give the reader confidence about the remainder the paper.”

Having been cited in a working paper version in the IPCC press statement of 8 December 2003 in which David Henderson and I were accused of spreading disinformation “questioning the scenarios used by the IPCC” and of being ‘so-called “two independent commentators”, the Manne and Richels paper has now (July 2005) been published in “Climatic Change” (edited by Professor Stephen Schneider of Stanford). There is now a third author (James Edmonds), but the argument based on Samuelson’s criticism of the “misleading pretentious doctrine” has been dropped (understandably in view of the Heston criticism).

So “the only intellectual basis provided … for using MERs” has now disappeared. The “Climatic Change” version of the paper includes an additional footnote which says “We make no attempt to evaluate the work reported in the SRES here and therefore pass no judgment as to whether or not an error was introduced.” This is two-and-a-half years after I flew to Amsterdam at short notice, at the IPCC’s urging that they wanted the matter resolved quickly to attend discussions with IPCC modellers including Rich Richels, one of the authors of the paper. Richels & Edmonds have since been selected as Lead Authors for the next IPCC report – Richels is a Lead Author of the Chspter that is to review criticisms of the SRES – Professor Nakicenovic, the Coordinating Lead Author of the SRES, is a Coordinating Lead Author of the Chapter that will review the criticisms. Despite my urging for three years, no economic statistician or national accounting expert has been appointed to the AR4 writing team, nor has any expert in these fields been invited to either of the expert meetings that the IPCC has held this year.

I’m well aware that use of PPP is more standard and in that sense you are likely to prevail in your fight with the IPCC. I still have some questions about the validity of the method itself, though. It smacks a bit of valueing a company by the balance sheet vice the market cap, savez-moi?

TCO, re #31 and #33. Of course the value of a company is its value in the market. Of course this jumps over the place but it is still the value. Of course the balance sheet value of a company is irrelevant. I don’t see these things as having anything whatever to do with the issue of how you define and measuring output and its growth over time for the purpose of projecting emissions growth or evaluating the impact of mitigation and adaptation measures. I assume that your comment that we are likely to prevail in our fight with the IPCC is intended as a joke.

No…it wasn’t a joke. Although if we can allow a companies value to flip all over the place, why can’t we do the same with a country’s? I mean in some fundamental sense, I think it is. Now what actions you take based on that are another issue. Just like, you don’t purely compensate the CEO by the share price. But I still think if a corporate value is market determined, why can’t GDP?

TCO, GDP is market determined. The System of National Accounts, prepared and published by the United Nations, the World Bank, the IMF, the OECD and the Commission of the European Communities following unanimous approval by the Statistical Commission of the United Nations, says that GDP AT MARKET PRICES represents the final result of the production activity of resident producer units (para. 2.171). Let me ask you one question. Do you think that a doubling in the value of coal production would have the same effect on emissions, whether it took the form of a doubling in the volume of output (measured in tons) or a doubling in the price of coal?

TCO, there is really no question that PPP rates should be used for making international comparisons of the level of output – this is just elementary national income accounting. Let me try a simple explanation. The output of an economy is in fact the sum total of goods and services produced, which is a list not a single number. GDP turns this list into a single number by valuing the goods and services at some sort of price – in the first instance the market prices ruling when the goods and services were produced. However over time prices change. If we want to work out how much more goods and services are being produced compared to some base date we have to adjust for the fact that prices have changed. This is done by deflating money GDP (the value in terms of the prices of the relvant moment) by a GDP deflator, which allows for inflation.

An exactly analagous problem arises when we try to compare output between countries, because prices of the same good or service differ between countries eeven when measured in common market exchange rates (MERs). PPP exchange rates are designed to take account of the different price structures in different countries so that the same physical amount of goods and services have the same value attributed to them in comparisons. If the law of one price held exactly at all times then PPP exhange rates would be exactly the same as MERs and there would be no problem. But there is substantail evidence that the law of one price does not hold and that non-traded goods and services are realtvely cheaper in poor countries.

As I said in my previous post there ae a whole host of other comre complex issues beyond this but the above is an elementary starting point and the Manne and Richels papaer is just guilty of an elematary confusion. For a simple approach try any textbook in international economics or you could look at

Thanks mikep. It really is just elementary national accounting, and your very clear explanation seems blindingly obvious to me. But, unbelievable as it may seem, none of the 53 authors, 4 review editors and 89 expert reviewers who took part in the preparation of the IPCC’s Special Report on Emissions Scenarios knew about elementary national accounting. In December 2003, the Panel took the trouble to issue a press release (the only press release issued over a period of more that two years that is available on its website) which was specifically and exclusively devoted to brushing aside the Castles and Henderson critique. According to this remarkable document, the IPCC “mobilises the best experts from all over the world, who work diligently in bringing out the various reports of this body on a regular basis… In recent months some disinformation has been spread questioning the scenarios used by the IPCC as developed in its Special Report on Emissions Scenarios 2000 (SRES). Like all reports published by the IPCC, this publication was based on an assessment of peer reviewed literature available at the time of the preparation of the report and subject to the review and acceptance procedures followed by the IPCC… Criticism of IPCC’s work has been mounted by so called ‘two independent commentators’ Ian Castles and David Henderson…”

In a dismissive response published in “Energy & Environment”, 15 lead authors of the IPCC report said that “Mr Castles and Mr Henderson have focused (at tedious length) on constructing a problem that does not exist.” Contrary to TCO’s belief, David Henderson and I won’t win the argument with the IPCC because the Panel has the big guns on its side – e.g., the Chief Scientist at the World Bank, Robert Watson (who’s still described as the Chairman of the IPCC on the “World Bank Experts” website, even though he ceased to hold the job more than years ago), and Professor John Weyant, Director of the Energy Modeling Forum at Stanford University. Watson and Weyant were members of the SRES Writing Team and they are not about to admit that they made a mistake. According to the Report of the IPCC Expert Meeting in Washington, DC, last January, the invited expert from the World Bank “started by stating that he will come up with different conclusions than Bill Nordhaus” (Nordhaus is only professor of economics at Yale, so he’s really not equipped to dispute the IPCC consensus) and went on to say that “When estimating economic growth, MERs are used because of consistency in national accounting.” Professor Weyant told the meeting that best practice (in terms of using PPP or exchange rates) “can differ between making historical welfare comparisons and model projections of GDP, energy and carbon emissions.” So far as I know, no national accounting expert in the world believes that this is the case.

I left out “three” – Robert Watson ceased to be Chairman of the IPCC over three years ago, in April 2002. He hasn’t acknowledged a letter that I wrote to him on 17 June, in which I pointed out that that the Expert website run by the Bank’s Media Department still said that he was Chair of the IPCC. The “World Bank Experts” page on the Bank’s website explains that the list is for journalists and that it is “updated regularly”.

if you follow the link to current research and then climate change. There is also a much fuller paper at the same address. Broadly the answer seems to be in the McKibbin model putting in the incorrect MER-based gap overstates emssions by 20% in 2050 and 40% by 2100.

Hans, The question you have asked is in fact extremely difficult to answer, and the fact that this is the case reflects poorly on the SRES and on the IPCC for deciding, in the face of warnings, that “the SRES scenarios provide a credible and sound set of projections, appropriate for use in the AR4.”

In order to give you some feel for the problem, I’ll first key in a few quotes from the full version of the paper by McKibbin, Pearce and Stegman that Mikep cites. Bear in mind that Warwick McKibbin is one of Australia’s most respected economists – a Professor of Economics at the Australian National University and a Fellow at Brookings Institution. His book “Climate Change Policy After Kyoto” (2002) (co-authored with Peter Wilcoxen) was the first publication of Brookings’ Energy and Environment program. The paper from which I’m quoting is the outcome of research funded by the Australian Greenhouse Office:

QUOTE 1: “If the modelers in the SRES used market exchange rate GDP differentials but the rate of convedrgence from the PPP convergence models then there is a problem as argued by Castles and Henderson… If the SRES models used an MER based convergence model by adjusting the rate of convergence to be consistent with the MER approach then there is still a problem because there is no evidence of convergence of GDP per capita in MER terms… However, it may just be that the models did something completely different to what is suggested in the SRES report…” (p. 7)

QUOTE 2: “Sure it is possible to construct a model where there is a relationship between PPP and MER and assume that one can always be converted easily into the other so that it can be seen purely as a “numeraire choice”. But that doesn’t mean it is a useful assumption to base real world analysis on… You can of course assume that there is a relationship between PPP and MER and make the problem disappear but without anything but wishful thinking as a basis.”

Another study funded by the Australian Greenhouse Office is by Peter Dixon and Maureen Rimmer (“Analysing convergence with a multi-country computable general equilibrium model: PPP versus MER”). Dixon too is one of Australia’s top economists. The paper, which was presented at the Annual Conference on Global Economic Analysis in Lubeck in June 2005 includes the following:

“In simulating the effects of convergence, we found that MER-based estimates of initial technology gaps lead to considerably higher estimates of convergence-induced growth in developing countries than do PPP-based estimates… If PPP is the right basis for estimating initial technology gaps, then the use of MER-based analysis runs the danger of significantly overestimating convergence-induced growth in developing countries and thereby overstating environmental concerns such as the emission of greenhouse gases.”

Neither of these Australian studies was available to the IPCC at the time of the press statement issued in Milan in December 2003 which said, on the basis of the Manne and Richels study, that “The claim of [Castles and Henderson], therefore, that there is an upward bias in the SRES scenarios is totally unfounded.”

“Indeed it is likely that the projections of emissions in the SRES were undertaken by the modelers before the chapter on economic growth was even written, because the economics of growth doesn’t really play an important role given the underlying methodology of the models used.”

On the “Bristlecone dc13: the Nail in the Coffin” thread (#4) Ross McKitrick writes:

“… the fact that these problems were never discerned by the publishing journals during peer review, nor by the paleoclimate community itself in follow-up analysis over 7 years, nor by the IPCC, government ministries and other high-level authorities before they grabbed the hockey stick graph and began promoting a policy agenda with it; puts all sorts of other questions on the table. If they got this argument that wrong, how do we know they didn’t get their other arguments wrong too?”

Exactly. And we do know that they got other arguments wrong – see my response to Hans Erren at #42 on this thread. In an article in the current issue of “Energy and Environment”, David Henderson quotes from an article that he and I wrote more than two years ago, as follows: “the questionable treatment of economic issues in the SRES and the IPCC’s Third Assessment Report, which as independent outsiders we [Castles and Henderson] have drawn attention to in this and our previous article, seems not to have been noticed by a single official in a single finance or economics ministry in a single country”. David then comments “Sad to say, if we were rewriting the article today we could leave this passage unchanged.”

The statement quoted by Peter Hartley (#43) is indeed rather extraordinary. Note that Warwick McKibbin, the first-named author of the article, is the first-named author of one of the analyses published in the Special Issue of the “Energy Journal” in 1999 on “The Costs of the Kyoto Protocol: A Multi-Model Evaluation.” The Guest Editor of the publication was John Weyant, Director, Energy Modeling Forum, Stanford University, who was assisted by Henry Jacoby of MIT, James Edmonds of PNNL and Richard Richels of the Electric Power Research Institute. Weyant has been selected by the IPCC to be Review Editor of Chapter 3 of the WG III Contribution to the next IPCC Assessment Report that is to review criticisms of the SRES. Richels is a Lead Author of the same Chapter and also of a Chapter in the Working Group II contribution to the Report (explicitly to provide a link between the Working Groups). Edmonds is a Lead Author of Chapter 2 of the WG III Contribution.

Among the co-authors of papers in the Special Issue of the “Energy Journal”, in addition to Warwick McKibbin and the four members of the editorial team already named, are Alan Manne of Stanford (co-author with Richels of the study cited by IPCC in its December 2003 press release dismissing Castles and Henderson) – see #32 above; William Nordhaus of Yale – see #25 above; Richard Tol of Hamburg, who told the House of Lords Economic Affairs Committee that “Castles and Henderson are very right to criticise these scenarios because they essentially assume convergence based on market exchange rates, which is ludicrous I think”; Hans Timmer, then of the Netherlands Bureau for Economic Policy Analysis, who is now at the World Bank and as the Bank’s expert told the IPCC Expert Meeting on Emissions Scenarios last January that “When estimating economic growth we use MER for consistency in national accounting” (!); Brian Fisher, a Coordinating Lead Author of Chapter 3 of WGIII; and Mikio Kainuma, a Lead Author of the same Chapter.

As a participant in this Stanford Energy Modeling Forum project which took place concurrently with the main phase of the development of the SRES, I think that it is fair to assume that Warwick McKibbin knows something about how the SRES modellers went about their work.

Hans, In their paper, McKibbin et al say that the 20% overstatement by 2050 and the 40% overstatement in CO2 emissions by 2100 that they find for the difference between PPP and MER approaches applies only to their own model (G-Cubed) and can’t be applies to the SRES models. See the statement quoted by Peter Hartley (#43). But, going the other way, the problems with the SRES scenarios go beyond their use of the wrong measure of GDP. This is from the evidence to the House of Lords Committee of Richard Tol of the University of Hamburg:

“… I was in at the very start of SRES, which was in 1996, and it was one of the most controversial debates I have ever seen… From the very start onwards it was clear that the SRES Team had placed itself under constraints of political correctness, that is to say because it is an IPCC exercise it has to be reviewed by all the governments in the world, and if you come up with scenarios in which the African countries, which are a fairly large bloc (in the UN) – IF THEY DO NOT GROW FAST ENOUGH, THEY WILL NEVER APPROVE OUR SCENARIOS” (EMPHASIS added).

By using the wrong measure of GDP (in fact, two wrong measures of GDP because some of the scenarios also use a so-called “PPP” measure which isn’t) the SRES modellers have made it extremely difficult, if not impossible, to reproduce what they’ve done and to estimate the effect on emissions arising from varying the assumptions. And even if the effects of overstating output growth and emissions intensity reductions cancel one another out in terms of the effect on emissions, the SRES would still be unusable for the analysis of impacts, adaptation etc., which require that the components be right, not just the net effect.

“If you look a little bit deeper into this, you find that the SRES (and IPCC) scenarios were essentially built by people who know a tremendous amount about energy supply. If you are interested in energy supply the team that built the SRES scenarios are the dream team, that is the people you want round the table if you want to talk about energy supply. But if you then move to other equally interesting issues such as energy demand or population growth or economic growth, you would find that the SRES team was perhaps lacking in expertise. Also, the modes that were used, the SRES scenario exercises, were essentially models that have been developed traditionally for energy policy analysis, and now all of a sudden these models have been used to build scenarios, and that is not what they were originally designed for. From that perspective, historically, it was not a surprise that the SRES scenarios would at some point be criticised by eminent economists such as Henderson. It may have been perhaps a surprise that it took so long!”

But there is a danger that we lose sight of the fundamental problems here. We really don’t know a lot about what climate change is going to occur and we are even more ignorant of its impact, especially because people will change their behaviour when the context changes (eg switcch crops, use different technolgies, investigate new problems). I was impressed with the evidence from Denis Anderson to the Committee

This stresses the uncertainties and argues that those uncertainties themselves mean that some of the estimates of costs of climate policy are beside the point. The question is really “what insurance premium does it make sense to pay”.

TCO,
If market forces truly determined all exchange rates, then there would be little use for PPP. In many cases, exchange rates are based on interest rates. Higher interest rates in one country lead to an influx of money and thus an increase in value of that country’s currency. Interest rates are often set by central banks based on internal growth rates and perceptions of inflation. It would be a stretch to say that market forces determine interest rates and thus exchange rates in many countries.

Other countries peg their currencies to specific currencies. For years, the Chinese Yuan was pegged to the US dollar at 8.29 Yuan = US$1.00. Now the Yuan is pegged to a basket of currencies, but market forces have little to do with the value of the Yuan.

PPP is simply an acknowledgement that market foreces do not determine all exchange rates.

Thanks Brooks. This is basically correct. The point is that, even if market forces determined the price of CURRENCIES (which as you say is certainly not true of the Chinese Yuan), this would still not ensure that the prices of goods and services were equalised between countries. The “law of one price” was postulated by the Swedish economist Cassel in 1918, but no one takes it seriously any more. At a workshop on the subject of PPP vs MER (market exchange rates) convened by the Stanford Energy Modeling Forum in February 2004, Professor Alan Heston of the University of Pennsylvania, a leader in the International Comparisons Project for over 30 years gave three reasons why the law of one price doesn’t hold (and therefore why you can’t measure output by dividing the GDP in yuan or yen or whatever by the exchange rate):
“First, there are non-traded goods that are commonly 50% of GDP. The forces driving prices of say wheat to one world price are not as pervasive for non-tradables, like auto repair. (The prime text-book examples of non-tradables in freshman Economics 1 would be haircuts!)
“Secondly, there are barriers to trade across countries that impose wedges between national and world prices of tradables.
“However, the third and the most important criticism today relates to the fact that the world is much more financially integrated than it was when Cassel wrote. This means that exchange rates are affected by relative interest rates in different countries. The volume of capital movements across countries today is over 50 times larger than the international trade in goods and services.”

I don’t know if I read that one specifically. I read some that I was directed to. and some that I googled. Several pointed out that the PPP issue was not finished. I will look at it some more later. My gut reaction is that it is commie macro weeny stuff. Not God-fearing supply and demand micro stuff.

TCO, I’m not sure what you mean by the PPP issue. There are at least two PP issues. The first arises from the question “what exchange rate should be used to compare GDP of one country with another so that the same goods and services get the same weight whichever country they are produced in?”. The only answer that makes sense to this question is “a PPP exchange rate” (which is exactly analgous to a GDP deflator). There is no ongoing debate about this. It is just elementary national income accounting.

There is a second issue which arises from the question “Are actual market exchange rates determined (in either the long or short term) by purchasing power parity ie is it the case that price levels in any pair of countries when measured in a common market determined exchange rate are equal, or tend to equality over time”. If the law of one price held then the answer to this question would be yes and market exchange rates would be the same as PPP rates. There is ample evidence that the law of one price does not hold in the short run, though there is some evidence that changes in exchange rates over the medium to long term are linked to changes in price levels. This whole issue is still being discussed.

The two issues are separate. The link is that if the law of one price did hold then market exchange rates would be equal to PPP rates and the correct PPP rate to use to answer the first question would also be the actual market exchange rate.

I think you should use the market price to reflect what the goods sell at. And I think that you should use the (traded) exchange rate to convert. And I think snow is worth more in the Sahara than in Alaska…or behind a trade barrier or a shipping barrier or etc. The basic idea is that something is worth what someone pays for it. If the market cap of a corp can gyrate so can GDP. Deal with it…

TCO, YOu are up against the classic index number problem. To make comparisons of output that are in any way meaningful requires that the same thing have the same weight in both baskets being compared. These weights could be the actual market prices ruling in either of the two countries, or some weighted average of the prices. There is no guarantee that comparisons will be the same when a different price structure is used. But that is because using different prices amounts to answering different questions. If, eg, we compared the US and the UK using US prices we would be answering the question “how much better or worse off would a US resident be if he or she were faced with UK instead of US ouputs of goods and services?. If we used UK prices the question would be “how much better or worse of would a UK resident be if he or she were faced with US instead of UK ouputs of goods and services?”. I can think of no sensible question to which comparisons using market exchange rates are the answer. To see this imagine a thought experiment. Because of a speculative bubble the value of the dollar against the pound falls overnight by x%. Does this mean that the US has become at once x% poorer relative to the UK as would be implied by using market exchange rates? Clearly not. There may be a terms of trade effect if the slide in the dollar makes imports relatively more expensive, but that cannot produce an x% fall in relative income, only something rather smaller.

Nope. I’m not up against any indexing problem. Something is worth what the market charges for it. If 5 smackaroos buys a widget in Hottentot land, then that’s what a widget is worth. Since smackaroos and dollars are traded freely, then I can covert into a dollar value. I don’t care if snow is worth more in the Sahara. And I don’t care that it’s volatile. It’s the market value.

You keep making circular arguments that essentially say if you want to PPP, you have to PPP. I don’t care to. That’s for liberals.

TCO, by your logic it presumably follows that if widgets in 1955 cost 5 dollars and today they cost 500 dolars that’s exactly what they were worth. So if output was one widget in each year national income has risen 100 times. This does not seem sensible to me. The whole difficulty of these comparisons is that prices are different in different places and times. It’s how to deal with that that makes all the difference. My argument is not circular. I am simply trying to find out what question you want answered. What comparison are you trying to make? If you were clear about that (and left out all the rhetorical stuff about liberals and commies which seems totally irrelevant to any of these issues or to reasoned argument) perhaps we could make some progress.

TCO, Among those you are labelling “bearocratic Euro-liberal globalists” are the members of the recent House of Lords Committee inquiry into the economics of climate change, including two former Conservative Chancellors of the Exchequer.

One of these, Lord (Nigel) Lawson asked Nebojsa Nakicenovic, Coordinating Lead Author of the IPCC Special Report on Emissions Scenarios: “Are you aware … that Professor McKitrick, a Canadian economist … has given evidence to us in which he says inter alia that … ‘even after serious flaws in the SRES have come to light, the IPCC has chosen to use the same scenarios for the fourth assessment report …’ Would it not be better, instead of trying to defend the intellectual capital which you feel that the IPCC has built up if you were to respond properly to the intelligent and informed critiques that have been made and produce something which is closer to the truth?”

In its unanimous report, the Committee severely criticised the IPCC for insisting “on the methodological soundness of the use of MER [marekte exchange rates] for developng long-term emissions scenarios.” They said that they “found no support for the use of MER in such exercises, other than from Dr. Nakicenovic of the IPCC.”

You said in #54 that you would look at the PPP issue some more later on. Please give it your urgent attention before sending any more posts on this subject.

“History has shown that, for whatever reason, humanity seems to make a new discovery whenever doom and gloom are prevalent, resulting in yet another spurt in economic activity when previous diminishing resources are replaced with new ones.

So has the IPCC ( Ian Castles ought to follow on from here) factored this in their scenarios for the future?

If we suddenly discovered a new source of energy which did not require the combustion of oil or enhanced decay of radioactive elements, and which has historically occurred when petroleum replaced whale oil, etc, has this been factored?

I suspect not, because none of us know the future, save Steve’s diligent critics who, like the prophets of old, are totally certain of their views.”

One of my areas of expertise is technological forecasting, particularly as it refers to energy. In fact I am undertaking a multi-client study at the moment for several Canadian research institutes, a national technology funding agency and an oil company which addresses itself specifically to forecasting primary energy substitution and related technology subsitutions to 2040.

Both Grubler and Nakicenovic have published in this area and the following things can be safely said:

They certainly believe that primary energy substitutions occur and will occur;

That these substitutions are driven by technological change;

That the next dominant primary energy on world markets will be methane;

That the robust trend of the decarbonization of the world economy points to hydrogen after methane.

Nakicenovic was a close collaborator with Marchetti at IIASA on the use of logistic substitution analysis for forecasting primary energy substitution and substitution between technologies. Nakicenovic wrote the software package.
See Society as a Learning System: Discovery, Invention and Innovation Cycles Revisited. Cesare Marchetti. Technological Forecasting and Social Change, volume 18 (1980).
and Nakicenovic’s recent report for the International Gas Union (at the IGU website).

I would be very surprised, given these facts, if these convictions did not carry over into the IPCC scenarios in some way. This is what they have built their academic careers on.

Nakicenovic is a “card-carrying” economist, with economics degrees from Princeton and Vienna. Grubler’s degrees are in engineering from the Technical University of Vienna. Both are at the International Institute for Applied Systems Analysis.

If you can get a currency market with a time machine going to trade dollars from 1955 to 1995, I have no problem with that example. Reread my example. Somethings WORTH what the free market charges for it.

And don’t frigging bother me with CPI…because I can extract inflation rates from a better source…interest rates of riskless investments.

sill macro weenies. Go play with the tree huggers. They will want PPP…thats what all the EUers love…

Mike, You’ve asked some large questions. Let me begin by quoting from the submission made to the recent House of Lords Committee inquiry by Richard Tol. Michael Otto Professor Sustainability and Global Change, Hamburg, Vrije and Carnegie Mellon Universities, and currently Visiting Professor, Princeton Environmental Institute:

“The SRES modellers know a lot about the supply side of the energy system, but less about the demand for energy. Their knowledge of economic development is lacking. Their demographic expertise is sound, but strangely separated. My personal knowledge of the SRES modellers confirms this assessment.”

IIASA’s knowledge of the supply side of the energy system is evident in section 4.4.8 of the SRES (“Prospects for Future Energy Systems”). The overview of the 20-odd selected energy technologies represented in IIASA’s MESSAGE model (see Box 4-9) is particularly impressive, and the sentence “The revolutionary change may well be less the hydrogen-powered fuel cell car itself, but rather that it could generate electricity when parked, dispensing entirely the need for centralized power plants and utilities.”

After I criticised the statistical and economic basis of the SRES, the IPCC invited me to an Expert Meeting on Emissions Scenarios in Amsterdam in January 2003, where Professor David Henderson and I had discussions with Professor Nakicenovic and some other SRES model-builders. In retrospect it was pointless accepting the IPCC’s invitation because the Panel is incapable of admitting that a report that was endorsed by governments is in error.

IIASA has been using technical statistical concepts (e.g., GDP, GNP) throughout its 30-year history, but has never sought advice about what they mean. They go on making the same mistakes. In his evidence to the HoL Committee, Prof. Nakicenovic said that “Our group developed a set of scenarios, the IIASA/WEC scenarios, that were published in 1998 by Cambridge University Press in a book called Global Energy Perspectives.” In that book, GNP was misdefined, and the same error was carried through into the SRES, published two years later. This book was the product of 9 lead authors, 4 contributing authors, a 10-member steering group, 9 regional coordinators and 115 expert reviewers, many of whom are now on the writing teams for the next IPCC assessment. It states, without citing a source:

“The largest portion of a country’s gross domestic product (GDP) is generated in urban areas and agglomerations. As an extreme case, it is estimated that 80% of the GDP of Indonesia is generated in the national capital.”

The correct figure is certainly less than 15%. I find it extraordinary that none of these energy specialists raised an eyebrow at the claim that over 80% of the output of a country of 200 million people was produced in one city – yet so far as I know no one has yet pointed out the error (just imagine the outcry if Bjorn Lomborg had made an error of this magnitude in his sole-authored book that many scientists have claimed to be riddled with errors – and criticise him for giving the appearance of scholarship in his 3000 footnotes).

In 1996, Nakicenovic wrote that “The present energy intensity of Thailand resembles the situation in the United States in the late 1940s. The energy intensity of India … [is] similar to [that] of the United States in about a century ago” (“Freeing energy from carbon”, “Daedaulus, Summer 1996: 100). Claims of this sort were repeated in the SRES four years later (s. 2.4.10).
These statements relate energy to GDP, but the authors fail to realise that you need a measure of REAL GDP for this purpose: the conclusions are therefore completely wrong.

IIASA apparently has no procedures to review its previous projections. The SRES cites “Hafele, W, J Anderer, A McDonald and N Nakicenovic, “Energy in a Finite World: Paths to a Sustainable Future” (giving 1981 as the publication date in the list at the end of chapter 2, and 1982 in the list at the end of chapter 3, but I think that it is the same book).

The two scenarios in this publication and the 834-page supporting volume (Hafele, W, 1981, “Energy in a Finite World: A Global Systems Analysis”) had proved to be so far astray by 2000 that it is surprising that the SRES authors wanted to draw attention to them.

The two regions that the IIASA experts projected to have the highest rates of GDP per capita growth between 1975 and 2000 in both scenarios(the USSR/Eastern Europe and the Middle East/North Africa) were the two regions which experienced negative growth for the period. The two regions that they projected to have the lowest per capita growth in both scenarios (China/Centrally Planned Asia and SE Asia/Africa) were the two regions that showed the highest per capita growth in both scenarios between 1975 and 2000.

Although over 140 authors contributed to IIASA’s 1981 study, they were simply unaware of much of the relevant peer-reviewed literature. For example, they claimed that “On a per capita basis, the urban population of India uses ten times more energy than does the rural population” (p. 750), whereas the leading research institution in international energy comparisons work (Resources for the Future, Washington) had published a study in 1979 suggesting that “the per capita consumption of energy is similar or perhaps lower among the poor in urban areas than in rural areas, or at least does not appear to be substantially higher” (Elizabeth Cecelski, Joy Dunkerly and William Ramsay, 1979, “Household energy and the poor in the third world”). So far as I can see, none of the RFF studies were cited in the IIASA volumes, a remarkable omission when the IIASA experts were trying to look 50 years into the future.

According to the IIASA 1981 study “The global primary energy supply mix in the scenarios seems to stretch almost every source to its logical maximum” (p. 664). World crude oil production was expected to peak in 2010 at about 100 mb/d in the high scenario and in 2015 at about 80 mb/day in the low scenario (p. 654). The IEA now expects that oil production will not peak before 2030, and will by then be over 120 mb/d (World Energy Outlook 2004, p. 105).

By 2030, the IIASA scenarios projected that “primary liquid fuels demands … would exceed, by 44 per cent and 64 percent, the global oil production levels thought to be the maximum possible and consistent with scenario assumptions.
The difference would have to be made up by coal liquefaction – amounting to 31 to 61 mb/d by 2030” (p. 660).

“Coal would be required in tremendous quantities – 7 to 13 billion tons per year in 2030 under the considitions of the scenarios. Some 56 per cent of these amounts would be required for the productions of synthetic fuels. Whether this amount of coal can be mined in the world is an open question”(p. 654).

The IEA now projects that coal demand will reach 7 billion tons in 2030 (IEA, Table 5.1), but the amount of coal used for liquefaction is expected to be negligible (IEA, p. 187).

IIASA expected nuclear energy to supply 23% of energy demands in 2030 under both the high and low scenarios (p. 787). The IEA now projects that nuclear will supply less than 5% of the global energy demands in that year (WEO, p. 430).

IIASA presented the outlook as alarming. Some extracts from the report follow.

“In a broad, long-term, and global sense, it may not matter whether synthetic liquid fuels from coal or from shales are cheaper. In either instance, the world would look to the Americas for its extra oil. And in either instance, it may be difficult for the exports to be forthcoming” (p. 663).

“Increased payments for energy – energy prices multiplied by energy use – reflect a potentially unsettling trend… In the developing regions, the increase [ in energy payments as a percentage of GDP] would be 300 per cent and more [by 2010]. Such indicators dim hopes for more rapid economic decelopment in the future” (p. 666).

“Our scenarios are globally comprehensive and allow for no escape… [O]ur scenarios are comprehensive enough to demonstrate that there is no way to escape the hardships… The global comprehensiveness of our study has shown that there is no escape from the finiteness of the earth’s fossil resources” (p. 785).

“Over the next fifty years, under any set of circumstances, economic growth rates will be limited… A major qualitative finding of our study is that it will be difficult, if not impossible, for the world to exceed annual growth rates of 3.5 per cent BECAUSE OF ENERGY SUPPLY CHARACTERISTICS” (P. 776, EMPHASIS added).

“One major characteristic of the future carbon-based economy is the short supply of fossil fuels, including coal” (p. 804).

“The reality of political, societal, and institutional problems will probably make the situation more grim than has been described in our two scenarios” (p. 778).

Of course the IEA may turn out to be just as wrong in about the next 25 years as was IIASA about the last quarter of the twentieth century. But the experience of the IIASA scenarios lends little support for the IPCC’s attitude that the SRES is beyond criticism. (I speak as one of the “two ‘so-called’ independent commentators” who have “questioned” (an unspeakable crime) the IPCC scenarios” :IPCC press statement of 8 December 2003).

I defer to Professor Nakicenovic and Dr. Grubler in their understanding of technological possibilities, but IIASA’s track record does not justify their categorical dismissal of the criticisms of the socio-economic projections in the SRES.

Re: 63
TCO, I agree with you that something is worth what particular market will pay for it. If, for example, I buy a typical breakfast in a restaurant frequented by locals, I know what I am willing to pay for it whether I am in Shanghai, Taipei, Seoul, Tokyo, London, Dahab, Geneva, Rome, San Francisco, or Austin.

The problem is that what I pay for a typical breakfast varies in a rather astounding way as I go from place to place. Each local resident feels comfortable paying the market price for his breakfast where lives. But if a resident of Dahab, Egypt suddenly found his local restaurant charging Geneva or London prices for his breakfast, he would likely have a cardiac arrest. If a Londoner were charged for his breakfast the price that a resident of Taipei would normally pay, he would most likely ask the server why the price was so incredibly low.

The CPI is a useful tool for following costs over time in a particular country, however each country (or region) has its own CPI which is not necessarily in sync with the CPIs from other countries.

Exchange rates have changed rather substantially during my career. For example, at SFr4.29 = US$1.00, Switzerland was quite reasonable if you were earning a salary in dollars. Today, at SFr1.20 = US$1.00, Switzerland is a very expensive place to visit. The SFr costs for the Swiss have not changed termendously over that time, but in US$, the change has been astounding.

Given that prices for commodities differ substantially from country to country, the CPI is different in each country, and both the CPI and exchange rates change greatly over time, I would be very suspect of any sort of economic projections based on MER. You have to make assumptions as to the CPIs, and MERs. You also need to pick a stable currency to use as the basis. Using MERs requires quite a few assumptions. Even a good projection would be far from the mark if some of these assumptions prove to be wrong.

Using PPP in economic projections can reduce some of the errors that would arise from changes in CPIs, and MERs over time. It also makes the choice of currency basis a minor issue.

I agree that it is more convenient for planning purposes. I just differ on what something is worth. It’s worth what someone pays for it. And the dollar to EU rate is whatever it trades at. Not what comparison of goods would give. yeah…breakfast is more expensive some places. So is snow in the sahara. Life sucks.

P.s. for a company: you earn what you earn. If you liquidate the firm and count the money, it’s the currency rate that matters, not the EU-beaurocrat-beloved PPP metric.

I settled down and read your post and it is a good one, Brooke. I think your point about use of the metric for this purpose is apt. I just still think something is worth what it’s worth. And so what if the conversions snake like crazy. If I want to invest in Saharan snow (but live in Alaska), I pay Saharan prices…

I am not trying to carry a flag for messrs Nakicenovic and Grubler. I was just trying to throw some light on the question asked in the quotation, whether the IPCC was likely to have considered if radical new technologies could transform the use and consumption of energy and of carbon based fuels in particular.

From what I know of their work, I think the answer is certainly “yes”. Whether they made errors in their analysis is another question which I am not qualified to answer since I have never read the IPCC report in question.

The thing about IIASA in my opinion (I have been there twice and talked with Nakicenovic among others) is that with its multi-disciplinary systems approach, it is not surprising that the kinds of details you cite slide between the cracks. They are to be faulted, I suppose, for not having their reports audited a la McIntyre ( 🙂 ) before they release them. Given the risks of error inherent in their approach, they really ought to have done.

On the other hand, they have turned out some brilliant stuff as a result of their approach, for example Kindler’s work on pollution plumes, and I certainly put the work on invention, innovation and energy substitution which Marchetti and Nakicenovic did in that category. Marchetti was a nuclear engineer, by the way, who worked at CERN. It is often the case that breakthroughs in a science or a technology are achieved by outsiders with a fresh perspective. Think of DNA – there was only one biologist in the team, the others were two chemists and a physicist. Together they revolutionized biology and created an entirely new discipline (microbiology). Bessemer, who revolutionized the steel industry, was in paints and glass. There are many, many examples of this.

Inevitably, in the process, there can be errors and misfortunes, but the end result is often very beneficial.

I certainly support your view of the Haefele study, which has come in for a great deal of criticism over the years.

Anyway, this thread and our discussion has persuaded me that I really ought to go and read the report in question, as my knowledge of the kinds of analysis Nakicenovic and Grubler use could probably provide some useful insights.

Mike, Thank you for your comments on my posting (now #64). I agree with most of what you have said, but would like to add a couple of points.

First, on the question of whether the IPCC modellers considered if radical new technologies could transform the use and consumption of energy and of carbon based fuels in particular. I think it depends on what one means by “new” and “transformed”.

According to the SRES, in discussing the technological assumptions underlying the MESSAGE emissions scenarios developed at IIASA, “technologies not yet demonstrated to function on a prototype scale were excluded” (Box 4-9, para. 4). It is presumably because of this assumption that the MARKER scenario with the lowest level of cumulative CO2 emissions across the century (the B1 IMAGE scenario) still assumes that almost half of the global energy supply in 2100 will be produced from fossil fuels (SRES, p. 506), and that the scenario with the lowest cumulative emissions across the century of the whole suite of 40 scenarios (the B1T MESSAGE scenarios) still assumes that 30% of the global energy supply in 2100 will come from fossil fuels.

To me, a transformation in the use and consumption of carbon fuels would include the possibility that all energy would be supplied from non-carbon sources by the end of this century. On this reasoning, at least one of the suite of scenarios claiming to cover the whole range of realistic possibilities should therefore have assumed that CO2 emissions from fuel combustion at the end of the century would be nil. I would be interested in your comment on this.

Secondly, on your point that Nakicenovic & Grubler are to be faulted for not having their reports audited a la McIntyre before they release them,
I don’t think that the problem was lack of an audit as such. As I said, the book that Nakicenovic instanced in evidence to the HoL Committee had 115 named expert reviewers, and presumably CUP also had it read by anonymous peer reviewers as well. But David Henderson and I have argued that peer review does not offer security against error when the reviewers all come from the same milieu. This example neatly illustrates the point.

The book that I mentioned appeared in 1998, about half-way through the four-year period during which the SRES was produced. There was a glaring error relating to Indonesia. Surprisingly, none of the 89 expert reviewers of the SRES came from ASIA, while no less than 12 of the 52 members of the SRES writing team came from the Netherlands, and 25 came from EU countries.

At this time the head of the national accounting area of the Netherlands Central Bureau of Statistics, one of the most highly regarded statistical agencies in the world, was Steven Keunig (he’s now moved to be the Head of the Statistics Department of the European Central Bank).

Steven’s doctoral thesis was on the Indonesian economy, and he was subsequently the main author of a UN study in the application of a system of national accounts in a developing country, taking Indonesia as an example.

I’ve no idea whether Steven was asked to review the IIASA/WEC book. He would certainly have set IIASA right on Djakarta’s output as a % of Indonesia, and on many other statistical failings as well – but so could many other national accounting statisticians at the CBS or at Eurostat.

They just didn’t recognise the need for professional statistical input and, so far as I can see, IIASA and the IPCC are still of the same mind. They use technical statistical concepts but fail to see the need to find out what they mean. So while I applaud IIASA’s interdisciplinarity as far as it goes, it doesn’t extend to economic statisticians.

More generally, I stress that I am not criticising the IIASA approach in principle. The point is rather that a wider range of inputs was necessary to do what they & the IPCC were trying to do in the scenarios (including from economic historians, historically minded economists, national accounts statisticians and index number theorists). In my opinion, the problem is still not recognised.

I think we are on the same page. The focus at IIASA is on models rather than data, rather like the climatologists and in that case it is unsurprising that it doesn’t occur to the alumni that having national accounts statisticians review things is a good idea.

What we are dealing with is the shortcomings of silos of organizational and disciplinary cultures in dealing with complex and complicated phenomena such as climate change and its social and economic impacts.

As you said, peer review doesn’t help if the reviewers belong to the same milieu/mind-set/culture.

We have to establish new protocols for researchers and reviewers to follow. We probably need a new group of people in the mix too, namely those trained to understand more than one discipline and in the social entrepreneurial skills required to bring people trained in different disciplines to accept, if not fully understand, the need for transdisciplinary auditing.

This is a general problem in technological innovation, by the way. The convergences ocurring among ICT, nanotechnology and biotechnology and the very nature of nanotechnology (in that is by nature interdisciplinary) mean that for efficient and effective exploitation we need people who can translate among disciplines. But the universities are not training such people, only specialists.

I entirely agree with your comment about the need to consider scenarios in which no carbon fuels will be used in the long term future. It is very interesting that in their logistic substitution analysis of primary energies, Marchetti, Nakicenovic and Grubler only consider nuclear after methane and after nuclear some other (undefined) process based on nuclear physics. There is nothing about wind, solar, tidal or biomass, for example.

In the long range plan I helped craft for Greater Vancouver, we did consider such scenarios. When I replicated MNG’s logistic substitution analysis of primary energies with 20 years more data I included non-hydro renewables as the primary energies to follow methane.

The results are highly influenced by what happens to nuclear. For Canada, it turned out that the penetration rate was highly dependent on whether or not nuclear makes a come-back. A nuclear moratorium puts back NHRs considerably (15% in 2040 versus 50%) versus a medium nuclear scenario. On a world scale, renewables chug on to about 20% regardless of the nuclear scenario (high, low, medium) but the methane peak moves around a great deal in time and size. Two explanations suggest themselves: methane-based technologies are highly substitutable for NHRs (which seems plausible re: efficiencies and pollution abatement and support for distributed energy systems); NHRs are simply not far enough their technical and market S-curves to be serious contenders for existing and proven technologies – in the absence of nuclear the energy system gravitates to what works and is economic.

I don’t like that they didn’t include technologies before the prototype stage. If the endpoint is 2100, that would be like leaving out the internal combustion engine in 1860 in an exercise aimed at 1960.

In any case, I don’t believe it is helpful in such long range scenarios to specify particular technologies, exactly because of this problem of being unable to imagine what does not yet exist (but which undoubtedly will). I prefer to use envelope curves of technical performance S-curves and historical analogy. I have an envelope S for machine efficiencies (kindly supplied by MNG) which I can extrapolate. I can create curves for particular machines – known or imaginary – because I can make assumptions about the midpoints and slopes of logistic versions of their Ss based on historical analogy. I am comfortable in doing this because they are historically very stable.

That enables one to create a scenario for energy efficiencies in 2100 and intervening milestones. Then you ask yourself, which kinds of technologies could conceivably achieve those efficiencies. From that you can hypothesize the structures of economies etc. e.g. will they likely be centralized and based on scale economies or decentralized and based on economies of scope.

This is to bring to notice the statement made by
Lord Nigel Lawson (former UK Chancellor of the Exchequer) before the US Senate Committee on Environment and Public Works last Wednesday, the full text of which is available at http://epw.senate.gov/hearing_statements.cfm?id=246944

After summarising the main conclusions of the unanimous report on “The Economics of Climate Change” by the Committee of which he was a member, Lord Lawson gave some views of his own, including:

(1) “The IPCC’s consistent refusal to entertain any dissent, however well researched, which challenges its assumptions, is profoundly unscientific;”

(2) “Although its now famous ‘hockey stick’ chart of temperatures over the last millennium … is almost certainly a myth, the IPCC refuses to entertain any challenge to it;” and

(3) “The IPCC’s scenarios exercise, which incidentally incorporates a a demonstrably fallacious method of inter-country economic comparisons, manifests a persistent upward bias in the likely amount of carbon dioxide emissions over the next hundred years. For example, a combination of steadily increasing energy efficiency and the growth of the less energy-intensive service economy has led to a steadily declining rate of growth of carbon dioxide emissions over the past 40 years: all the IPCC’s scenarios unaccountably assume an abrupt reversal of this established trend”…

“In conclusion, I believe that the IPCC process is so flawed, and the institution, it has to be said, so closed to reason, that it would be far better to thank it for the work it has done, close it down, and transfer all future international collaboration on the issue of climate change, where the economic dimension is clearly of the first importance, to the established Bretton Woods institutions.

“It is profoundly important that all governments, most importantly their Treasury departments, make their own independent and rigorous economic analysis of the issue. At the time the Lords committee was taking evidence this, for whatever reason, had not happened in the UK. I very much hope that, following our report, it will.

“We appear to have entered a new age of unreason, which threatens to be as economically harmful as it is profoundly disquieting. It must not be allowed to prevail.”

I have to say that I’m rather unimpressed with what I’ve heard in the way of excuses in relation to the growing discrepancy between SRES-type projections and actual measurements of atmospheric CH4 (it came up a couple of weeks ago in a workshop here). IMO this is developing into quite a credibility gap and I hope that there will soon be a better answer than “we don’t know, so we’ll just keep using the old scenarios even though they all already show a substantial overestimate within 5 years of being published”.

I got to thinking about the IPCC SRES scenarios and whether they are in any way reasonable. The IPCC says:

In simple terms, the four storylines combine two sets of divergent tendencies: one set varying between strong economic values and strong environmental values, the other set between increasing globalization and increasing regionalization . The storylines are summarized as follows (Nakicenovic et al., 2000):

“⠠ A1 storyline and scenario family: a future world of very rapid economic growth, global population that peaks in mid-century and declines thereafter, and rapid introduction of new and more efficient technologies.
“⠠ A2 storyline and scenario family: a very heterogeneous world with continuously increasing global population and regionally oriented economic growth that is more fragmented and slower than in other storylines.
“⠠ B1 storyline and scenario family: a convergent world with the same global population as in the A1 storyline but with rapid changes in economic structures toward a service and information economy, with reductions in material intensity, and the introduction of clean and resource-efficient technologies.
“⠠ B2 storyline and scenario family: a world in which the emphasis is on local solutions to economic, social, and environmental sustainability, with continuously increasing population (lower than A2) and intermediate economic development.

Which all sounded pretty reasonable … until I looked at some of the details. The details of the scenarios are available here as an Excel spreadsheet.

First, I looked at total primary energy use. This is the sum of coal, oil, gas, nuclear, biomass, and “other renewables”. I used the four “Message” scenarios as representing the mid-range values. Here are the results:

Now, that all looks fairly reasonable, so I next looked at their population estimates.

These are reasonable as well, with the highest one approximately equal to the UN “high” projection, the middle one equal to the UN “middle” projection, and the lowest ones equal to the midpoint between the UN “medium” and “low” projections. It’s weighted towards the high end, but that’s OK since we are looking for maximum effects.

Then I looked at the energy use per capita. Here things get weird.

Three of the four scenarios project nearly identical increases in per capita energy use, while the per capita energy use in the A1 scenario is off the charts. What’s up with that?

Finally, there has been a lot of talk that the economic assumptions are wonky. To investigate this, I looked at the per capita growth in the four scenarios, and compared it to the economic growth in the US over the last 35 years. This chart shows the percentage growth in the GNP/capita for the four scenarios, as well as the growth that would occur using historical US rates.

To me, their economic assumptions are all way too high. The US economic growth during the last 35 year has been among the world’s strongest. Their scenarios all assume world growth will be either near to, above, or way, way above the recent US growth rate. [Curiously, the average growth rate since 1970 (2.0%/yr) is almost identical to the average US growth rate since 1900 (2.1%/yr), so 2.0% is a reasonable number to use for the US.]

To me, this is ridiculous. Whatever the planet might do over the next century, it beggars belief that as a whole the world GDP growth will match the historical US growth rate, much less be three times as large.

[…] After release of the 2001 Third Assessment Report (TAR) two papers by Ian Castles and David Henderson (C&H) were published drawing attention to the problems with the emission scenarios used to produce the three projections.[1] Castles explained the concerns as follows; […]

[…] After release of the 2001 Third Assessment Report (TAR) two papers by Ian Castles and David Henderson (C&H) were published drawing attention to the problems with the emission scenarios used to produce the three projections.1 Castles explained the concerns as follows; […]